Ebook Budget setting autonomy and political accountability
Fiscal decentralization is a policy objective advocated by international organizations such as the World Bank (World Bank, 2000) and the OECD (OECD, 2001, 2002). Moreover, it has become a dominant trend in several countries (Epple and Nechyba, 2004).
However, the degree to which it is implemented, both on its expenditure and tax collection aspects, varies a lot. Different institutional arrangements on the sharing of competencies between central (or federal) and local (or state) governments exist (see, for instance, Ter-Minassian, 1997, and OECD, 1999).
A recent study by the OECD (OECD, 1999) has looked in detail at the tax setting autonomy of local governments in 19 countries. It focuses both on taxes collected at the local level and tax-sharing arrangements. These latter refer to taxes collected by the central government, whereof part of what is collected by (or arising from activities located in) a local government’s territory accrues automatically and unconditionally to it. Taxes and tax-sharing revenues are classified into eight categories of decreasing autonomy.
The largest autonomy occurs when local governments are free to chose both tax rates and bases, while the lowest level refers to centrally set tax rate and base. Table 5 summarizes the results of the study. For each level of local government in each country, the percentage of revenues falling into each category is computed. Table 5 displays, for each country, the unweighted average across all local government levels (i.e., for Portugal, autarquias, on the one hand and autonomous governments from Madeira and Azores, on the other).
Table 5 allows one to conclude that local governments are far from having full control of their fiscal revenue. It is noteworthy that transfers from the central government and supra-national institutions like the European Union, virtually totally out of local governments’s control, are outside the scope of the OECD study. Also, in some countries the central government decides on an allowable range for the tax rates on revenue sources falling into categories (a) and (b). Hence, if anything, the figures in Table 5 are too optimistic about local governments’ autonomy. Table 5 also makes clear that there is considerable variation among countries. In this study, Portugal shows up as one of the countries where local governments enjoy less revenue setting autonomy.
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